Q1 2024 Safehold Inc Earnings Call
Good morning, and welcome to say for first quarter 2024 earnings Conference call.
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At this time for opening remarks and introductions.
I would like to turn the conference over to Pierce Hoffman Senior Vice President of capital markets and Investor Relations.
Pearse Hoffmann: Please go ahead Sir.
Pearse Hoffmann: Good morning, everyone. Thank you for joining us today for safe holds earnings call.
Pearse Hoffmann: Our call today, we have Jay Sugarman, Chairman and Chief Executive Officer, Brett <unk>, Chief Financial Officer, and Tim Doherty Chief Investment Officer.
Pearse Hoffmann: This morning, we plan to walk through a presentation that details our first quarter 2024 results. The presentation can be found on our website at Staples, Inc. Dot com by clicking on the investors link.
Pearse Hoffmann: There will be a replay of this conference call beginning at two P M Eastern time today.
Pearse Hoffmann: The dial in for the replay is 877 for a one or 010 with a confirmation code of 504 75.
Pearse Hoffmann: In order to accommodate all those who want to ask questions. We ask that participants limit themselves to two questions during Q&A.
Pearse Hoffmann: You'd like to ask additional questions you may reenter the queue.
Pearse Hoffmann: Before I turn the call over to Jay I'd like to remind everyone that statements in this earnings call, which are not historical facts may be forward looking our actual results may differ materially from these forward looking statements and the risk factors that could cause. These differences are detailed in our SEC reports.
Speaker Change: <unk> disclaims any intent or obligation to update these forward looking statements, except as expressly required by law.
Pearse Hoffmann: Now with that I'd like to turn it over to chairman and CEO Jay Sugarman Jay.
Jay S. Sugarman: Thanks, Paris, and thank you to everyone joining us this morning.
Jay S. Sugarman: So it's all delivered solid earnings in the first quarter highlighted by important progress on the right side of the balance sheet and continued efforts to run more efficiently and keep G&A under control.
Speaker Change: Deal activity in the first quarter with limited with higher interest rate headwinds slowing overall market activity. So the pipeline is a good number of deals that should close in the second quarter.
Speaker Change: In terms of the overall market CBRE continues to provide updated UCA value marks reflecting higher cap rate assumptions and incorporating tougher office underwriting standards.
Speaker Change: <unk> lower building values are driving higher G. L. T V ratios.
Jay S. Sugarman: It makes sense given the current market environment.
Jay S. Sugarman: Lastly, with respect to caret, we received requests from the VC investors, who participated in the first round to exercise the redemption option that was expiring this year.
Jay S. Sugarman: As a result, we decided to simply redeemed the entire round and focus on future round investors.
Jay S. Sugarman: This will simplify our go forward structure, while we work to position carriage for investment by the longer term family office type investors that participated in the second round and continue to express interest in caret.
Jay S. Sugarman: With that let me turn it over to Brett to review the quarter in more detail Brian.
Brett: Thank you Jay and good morning, everyone.
Brett: Start with a summary of the quarter on slide two.
Brett: First quarter was highlighted by strong capital markets execution and positive pipeline momentum.
Brett: On the capital front during the quarter, we issued 300 million of 10 year unsecured notes at a six 1% coupon.
Jay S. Sugarman: The net proceeds were used to repay outstanding revolver borrowings.
Jay S. Sugarman: In connection with the offering we settled a portion of our outstanding hedges and realized cash gains of approximately $21 million.
Jay S. Sugarman: After applying those gains to the notes semiannual yield to maturity decreased by more than 80 basis points to a five 3% yield.
Jay S. Sugarman: We've been speaking about the value of our hedges for several quarters now and are pleased to highlight the realization of their value with its execution.
Jay S. Sugarman: We currently have an additional $350 million of long term hedges outstanding at a significant current mark to market gain possession of approximately $45 million, which are expected to provide a benefit to the true economic cost of future financings.
Jay S. Sugarman: After quarter end, we entered into a new 2 billion unsecured revolving credit facility, which replaces an upsize is our previous 1.85 billion aggregate facilities.
Jay S. Sugarman: Outstanding amounts under our previous facility were rolled over into the new facility.
Jay S. Sugarman: In addition to the immediate $150 million of incremental credit capacity. This facility resolves the company's nearest term maturity with a fresh five year term, which includes two six month extension options lowers the cost per drawn amounts adjusted so for plus 85 basis points and improved overall financial flexibility for the company.
Jay S. Sugarman: We were also able to add a commitment from a new banking relationship which is a win in this environment.
Jay S. Sugarman: Overall, we are very thankful to all of our banking partners that see a significant opportunity for safe old in both the near and long term.
Jay S. Sugarman: As a reminder, the facility benefits from in place hedges, including $500 million of Super swaps at a rate of approximately 3% for the next four years.
Jay S. Sugarman: At current levels is saving the company approximately $3 million of cash interest per quarter.
Jay S. Sugarman: Particularly valuable slop, if higher for longer as the new normal.
Jay S. Sugarman: Moving to the pipeline, we have seen customer engagement steadily pick up over the course of the year.
Jay S. Sugarman: Engagement is leading to tangible activity as we currently have eight LOI signed for potential commitments of approximately $145 million.
Jay S. Sugarman: These potential investments are all multifamily diversified across six markets in five sponsors with credit metrics in line with portfolio targets, which are approximately 35% of G. L. T V. Approximately three times rent coverage and approximately seven 5% economic yield.
Jay S. Sugarman: We expect the majority of the close in Q2, while others will occur over the remainder of the year.
Jay S. Sugarman: These are non binding commitments with no assurances that they will close and are eligible for our joint venture of which our partner owns 45%.
Jay S. Sugarman: We view this uptick is a positive signal that real estate operators are coming back to the table.
Jay S. Sugarman: At quarter end. The total portfolio was $6 5 billion UCA was estimated at $9 1 billion G. LTV was 47% and rent coverage was three six times.
Jay S. Sugarman: We ended the quarter with $1 1 billion of liquidity, which is further enhanced by the unused capacity in our joint venture.
Jay S. Sugarman: Between liquidity and JV capacity. This is the most buying power and stakeholders had since inception and with no debt maturities until 2027 will be focused on pursuing investment opportunities at current valuations and yields are attractive.
Jay S. Sugarman: Slide three provides a snapshot of our portfolio growth.
Jay S. Sugarman: In the first quarter, we funded a total of 71 million, including $66 million of ground lease fundings on preexisting commitments that have a six 7% economic yield.
Jay S. Sugarman: And 5 million related to our 53% share of the leasehold loan fund, which earned interest at a weighted average rate of Stouffer, plus 605 for the quarter.
Jay S. Sugarman: Our ground lease portfolio has 137 assets and has grown 19 times since IPO, while the estimated unrealized capital appreciation sitting above our ground leases has grown 21 times.
Jay S. Sugarman: Much of this growth has been driven by our focus on multifamily assets.
Jay S. Sugarman: Which has increased from 8% of the portfolio of IPO seven years ago. So now 55% of all ground leases by count.
Jay S. Sugarman: Post COVID-19 or over the last four years as you can see in the chart approximately 70% of new investments have been ground leases under multifamily assets.
Jay S. Sugarman: In total the unrealized capital appreciation is comprised of approximately 35 million square feet of institutional quality commercial real estate.
Jay S. Sugarman: Think of approximately 18100 multifamily units.
Jay S. Sugarman: <unk> 5 million square feet of office over 5000 Hotel keys, and 2 million square feet of life science and other property types.
Jay S. Sugarman: Continuing on slide four let me detail our quarterly earnings results.
Jay S. Sugarman: For the first quarter revenue was $93 2 million net income was $30 7 million and earnings per share was <unk> 43.
Jay S. Sugarman: The significant increase in GAAP earnings year over year is primarily due to $21 6 million of merger and caret related costs that occurred in Q1 2023.
Jay S. Sugarman: There were no similar nonrecurring adjustments made in Q1 2024.
Jay S. Sugarman: On an apples to apples basis, excluding 2023 as nonrecurring items EPS was up <unk> <unk> year over year, driven by an approximately $8 6 million increase in asset level revenues from new investments and rent growth offset by approximately $7 8 million of additional interest expense.
Jay S. Sugarman: Same store percentage rent was up approximately 850000 versus last year or 23% increase primarily due to strong performance at our park hotels assets, which is back to pre COVID-19 performance levels.
Jay S. Sugarman: As detailed in the past when we announced and closed the internalization. We believe G&A net of SDA drove management fee for the company would be approximately 50 million per year.
Jay S. Sugarman: 2023 we beat that expectation by approximately 10%.
Jay S. Sugarman: On the last earnings call, we said, we hope to reduced net G&A by another 5% for 2024.
Jay S. Sugarman: For the first quarter of 2024, net G&A was approximately $10 million.
Jay S. Sugarman: Which is approximately $40 million on an annualized basis, which means we are now revising our 5% reduction target upwards to a 10% reduction.
Jay S. Sugarman: We continue to find ways to reduce the cost structure of the company I look forward to continuing to update the market on these improvements that directly help the bottom line.
Jay S. Sugarman: On slide five we detail our portfolio yields.
Jay S. Sugarman: As discussed in prior quarters, our portfolio yields differ between what we recognize for GAAP versus what we underwrite and assumed to earn economically.
Jay S. Sugarman: To illustrate this point, we provided additional detail on the components that make up each year.
Jay S. Sugarman: For GAAP earnings the portfolio currently earns a three 6% cash yield at a five 3% annualized deal.
Jay S. Sugarman: Annualized yield includes noncash adjustments within rent depreciation and amortization, primarily from accounting methodology on IPO assets, but this excludes all future contractual variable rent such as the fair market value resets percentage rent or CPI based escalators.
Jay S. Sugarman: Those variable rent features are significant value drivers and core to our investment thesis for each deal.
Jay S. Sugarman: As such it is our view that GAAP annualized yield is not an accurate reflection of the true earnings power of the business.
Jay S. Sugarman: We believe the simplest and most accurate way to estimate the economics for these leases is to utilize basic bond or IRR math.
Jay S. Sugarman: Using this approach our portfolio generates an expected five 7% economic yield which is in line with how we've conservatively underwritten these investments.
Jay S. Sugarman: This economic yield has further upside when you include the periodic CPI look backs, we have in leases as well as the future ownership rights to the buildings and improvements above our land at no cost.
Jay S. Sugarman: Under the federal Reserve's current long term breakeven rate of 2.35% the.
Jay S. Sugarman: Five 7% economic yield increase was due at five 9% inflation adjusted deal.
Jay S. Sugarman: Five 9% inflation adjusted yield then increases to seven 5% after layering in an estimate for unrealized capital appreciation using safe holds 84% ownership interest in carrier and its most recent 2 billion valuation.
Jay S. Sugarman: We believe unrealized capital appreciation in our assets to be significant source of value for the company that remains largely unrecognized by the market today.
Jay S. Sugarman: Turning to slide six we highlight the diversification of our portfolio by location and underlying property type.
Jay S. Sugarman: Our top 10 markets by gross book value are called out on the right representing approximately 70% of the portfolio.
Jay S. Sugarman: We include key metrics, such as rent coverage and G. LTV for each of these markets and we have additional detailed at the bottom of the page by region and property type.
Jay S. Sugarman: <unk> increased modestly during the quarter, notably.
Jay S. Sugarman: Notably we've had approximately 80% of our office assets reappraised over the last two quarters.
Jay S. Sugarman: As a reminder, we have CBRE appraise the combined property value of our assets annually to help us highlight for the market, our mark to market attachment point and estimated unrealized capital appreciation and the assets across the portfolio.
Jay S. Sugarman: This approach is in contrast to other real estate finance companies that quote ltvs at origination despite any market shifts or knowing how much credit enhancement exists today.
Jay S. Sugarman: Rent coverage on the portfolio remained stable quarter over quarter at three six times underscoring strong operations at the property level despite valuation headwinds.
Jay S. Sugarman: We continue to believe that investing in well located institutional quality ground leases in the top 30 markets that have attractive risk adjusted returns will benefit the company and its stakeholders over a long periods of time.
Jay S. Sugarman: Lastly on slide seven we provide an overview on our capital structure.
Jay S. Sugarman: At the end of the first quarter, we had approximately $4 5 billion of debt comprised of $1 8 billion of unsecured notes $1 5 billion of nonrecourse secured debt.
Jay S. Sugarman: $911 million drawn on our unsecured revolver and $272 million of our pro rata share of debt on ground leases, which we own in joint ventures.
Jay S. Sugarman: Our weighted average debt maturity is approximately 21 years and we have no maturities due until 2027.
Jay S. Sugarman: Pro forma the $150 million of incremental credit capacity from our new revolver closed after quarter end, we have approximately $1 1 billion of cash and credit facility availability.
Jay S. Sugarman: Our credit ratings are 83 with stable outlook at Moody's and Triple B plus with positive outlook at Fitch.
Jay S. Sugarman: As discussed we seek to appropriately manage interest rate risk on floating rate debt and have put hedges in place to do so.
Jay S. Sugarman: Of the approximately 911 million revolver balance outstanding.
Jay S. Sugarman: $500 million of swap to fixed silver at 3%.
Jay S. Sugarman: This is a five year swap that we have protection on through April 2028.
Jay S. Sugarman: We receive a swap payments on our current cash basis, each month and at today's rates produces cash interest savings of approximately 3 million per quarter that is currently flowing through the P&L.
Jay S. Sugarman: We also have $350 million of long term treasury locks at a weighted average rate of approximately three 7%.
Jay S. Sugarman: Today, our long term hedges are approximately 45 million in the money.
Jay S. Sugarman: The outstanding hedges are mark to market, so no cash changes hands each months and while we do recognize these gains on our balance sheet in other comprehensive income they are not yet recognized in the P&L.
Jay S. Sugarman: While hedges can be utilized through the end of their designated term.
Jay S. Sugarman: They can be unwound for cash at any point prior.
Jay S. Sugarman: As we look to term out revolver borrowings with long term debt, we have the ability to unwind the hedges, which would then flow through the P&L thereafter.
Jay S. Sugarman: We are levered, one nine times on a total debt to book equity basis.
Jay S. Sugarman: The effective interest rate on permanent debt is 4.0% in the portfolio's cash interest rate on permanent debt, it's three 6%.
Jay S. Sugarman: So to conclude while the recovery in transaction volume has taken longer than we have like there are tangible signs of activity surfacing, both in our business and in real estate generally.
Jay S. Sugarman: We positioned the company with ample liquidity no near term maturities and hedges that are in the money and look forward to thoughtfully, putting our capital to work.
Jay S. Sugarman: And with that let me turn it back to Jack.
Jack: Thanks, Brett.
Jack: While we still expect rates to stabilize and eventually start declining we need to be prepared to wait out higher rates.
Jack: Well, we use our strong balance sheet to take advantage of the very attractive risk return on deals that are in a position to close it.
Jack: We continue to engage with customers, we will be ready to execute when rates eased back to lower levels.
Speaker Change: Okay, operator, let's open it up for questions.
Speaker Change: Thank you.
Speaker Change: To ask a question. Please press star one at this time.
Speaker Change: We'll take as many questions as time permits.
Speaker Change: Once again, please press star one to ask a question.
Speaker Change: We will pause a moment to assemble the roster.
Speaker Change: Thank Keith.
Speaker Change: Our first question is coming from Nathan Crossett with BNP.
Nathan Daniel Crossett: Linus life.
Nathan Daniel Crossett: Hey, good morning, maybe a quick one.
Nathan Daniel Crossett: Was wondering if you could just speak to the farnell outside of the $145 million that you disclosed in the deck. This morning.
Nathan Daniel Crossett: What are your kind of current expectations for maybe the next 90 days based on the conversations you guys are having.
Nathan Daniel Crossett: And then just on the funding side, if you could just.
Nathan Daniel Crossett: How are you going to fund the deal flow and assuming that the JV will be part of that but if you can just confirm that that'd be great. Thanks.
Speaker Change: Yeah I'll answer the question on the on the pipeline as you can see there's been a good pick up were encouraged by.
Speaker Change: How the pipeline has been this entire year versus last year and you see the LOI that are signed here.
Speaker Change: With the volatility is still in the market.
Speaker Change: Were hesitant on what's the next 369 months could be it all depends on the stability and visibility of our rates, but very encouraged by the activity in the market and what we're seeing on our own pipeline.
Speaker Change: And then on the capital side as you heard Brad and the team have done a great job setting us up.
Speaker Change: Very nicely on the right side of the balance sheet, but I'd say that it's an excellent time to invest so we love that but.
Speaker Change: The JV is not the best way for us to take advantage of those opportunities, but it's the best way for US right now minimises the capital needs, but we'd like to move beyond that and really start taking advantage of opportunities on our own.
Speaker Change: Okay.
Speaker Change: Okay. That's helpful I'm just.
Speaker Change: The activity is it is it solely in multifamily still at this point.
Speaker Change: So what we're looking as we always have approached the market and find whereas actionable and right now multifamily is the most actionable a property type.
Speaker Change: So you're seeing the vast the majority of our deals in all of the LOI deals are in that space.
Speaker Change: We're looking at everything else keeping our eye on all the other property types, but in terms of the deals that actually pencil well for those clients in the market and all the participants it's been in the multifamily space.
Speaker Change: Okay I'll leave it there thanks.
Speaker Change: Thank you. Our next question is coming from Anthony Powell alone with J P. Morgan Your line is nice.
Anthony Powell: Yes. Thanks.
Anthony Powell: Jay I think you're you you finished off your opening remarks with with something about just rates coming down and maybe bringing the the activity back a bit here in the offing you can you talk a bit about.
Anthony Powell: Kind of where you think cash on cash going in yields need to be to kind of see you do more folks are sort of take the ground lease option and just how far away from that you might be right now.
Jay S. Sugarman: Yeah, like I say okay.
Jay S. Sugarman: So if you think about the end of last year, we started to see a pretty pronounced move down in rates and I can tell you that the team was very busy. So we know customers there is elasticity here.
Anthony Powell: Not just our pricing, but also the leasehold lender pricing. So it's kind of a double benefit when they go down in a double hit when they go up I would say that last 50 basis point move that started in late first quarter.
Anthony Powell: Definitely having a little bit of a chilling effect on some of the deals we thought we'd get to the finish line. So if rates did fall back 50 basis points, I think you'd see a fairly pronounced change.
Anthony Powell: 10, 20 basis points, you know markets are just 50 basis points. It seems like the market struggles to adjust.
Anthony Powell: So 30 year today is in the $4 50, 464, 70 range I think four in a quarter would be a you know let's.
Anthony Powell: A stable sort of good launching pad for a whole new set of customers and certainly when when rates look like they were headed before market looked like it had it had some momentum so.
Speaker Change: Can't predict when that'll happen.
Anthony Powell: We fundamentally believe this this market is reached.
Anthony Powell: Reaching a point, where the next move will be down in rates, but we just don't know when that will be.
Speaker Change: Okay. Thanks for that.
Speaker Change: Then just my second one.
Speaker Change: You'd commented on G&A and so just was hoping to maybe flush that out a bit more to think through the rest of the year because I think.
Speaker Change: Your management fees step down I believe here in the second quarter and so.
Speaker Change: Just trying to understand like gross and net G&A like over the next few quarters, maybe if you could help with that a little bit.
Speaker Change: Yes, Hey, Anthony it's Brett so when we think about G&A as you saw for the first quarter net of the management fee from Star Holdings, It was about $10 million.
Brett: If you annualize that you would get to about a $40 million number to your point the each of those line items such as the management fee will start to decline.
Speaker Change: Accrual is based on time sheets as we've talked about so you'll start to see a decline each quarter as you know the assets or monetize in less time is spent I think from a regular way G&A perspective on the P&L again, we continue to find ways to create efficiencies both in <unk>.
Speaker Change: Personnel as well as services vendor costs, just overall expenses.
Speaker Change: So as I mentioned on the last earnings call, we were targeting a 5% cut.
Speaker Change: Cut of G&A from 'twenty to 'twenty three to 'twenty 'twenty four I think.
Speaker Change: Sitting here today, it feels like a 10% cut from last year to this year and being out of $40 million number is appropriate.
Speaker Change: So again it is it'll have a little bit of volatility quarter to quarter based on the management fee.
Speaker Change: But on an annual basis $40 million as our target.
Speaker Change: Okay. So we should expect what was the sort of like 15 or $15 million to $16 million of total G&A on the P&L in the first quarter rate that should trend down over over the year that it sounds like to keep that net about constant.
Speaker Change: Yeah, that's about right and then there was one time items.
Speaker Change: Yeah Board of director costs that hit in the second quarter. Each year. So I'd say you know outside of that one time item as well as that steady decline, that's probably appropriate in terms of what you saw.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question is coming from and all signs used with Mizuho. Your line is life.
Speaker Change: Hi, Good morning, guys. This is Ravi the idea on the line for <unk> Hope you guys are doing well.
Ravi: And broadly here, how do we for modeling perspective, how do we think about acquisitions going forward on them on a run rate basis like.
Ravi: Would you say I mean, I understand there is volatility in kind of tough to pin down but would you say 100 $150 million a quarter is fair given given what you have in your in your current pipeline.
Speaker Change: Yeah, I think as our annual goal, that's probably a pretty good goal for the market as choppy as this one.
Speaker Change: Again, I think we're a little bit disappointed we came into the year feeling really good about that last 50 basis points not the few deals that.
Ravi: Hopefully, we'll come back if the markets settle down but.
Ravi: These are deals typically you don't have a little bit of margin of error. They don't have 50 basis points of cost on their debt margin of error. So.
Ravi: It's going to come down a little bit to how the market sentiment around future.
Ravi: Races, and then we see that reflected in the 10 year and 30 year. Almost every day now so I know Jim and the team.
Ravi: We're going to build our way back towards what kind of volumes, we are used to but it's going to take some time and you know $100 million a quarter.
Ravi: Base would be a good starting point to start building back.
Speaker Change: Got it that's helpful. Just one more here and can we assume that all of these acquisitions are going to come in through the JV. How much capacity do you have left in that JV and are there any accordion option that we should be aware of.
Speaker Change: Yeah, I mean right now there's about 200.
Speaker Change: Third party capital from our sovereign wealth partner that we can tap into and yes. They are actively looking at the deal flow. So we.
Speaker Change: We expect other than some relatively small deals that they'll play.
Speaker Change: As I said this is not the best thing for US. We think today is one of the best investment environment for what we do in a long time, so we'd like to put out more capital, but given where our equity cost of capital is right now I think that the JV is still a valuable piece of the story.
Speaker Change: Okay.
Speaker Change: Understood. Thank you.
Speaker Change: Yes.
Speaker Change: Thank you. Our next question is coming from Mitch Germain with citizens. Your line is live.
Mitchell Bradley Germain: Oh, Thank you can I get some details around the redemption do they do.
Mitchell Bradley Germain: I understand that it was done at a discount to what the purchase was at.
Mitchell Bradley Germain: Yeah. So.
Speaker Change: Let's take a step back on that one.
Speaker Change: The first.
Speaker Change: Brown was really to get some people involved who we think understood how caret could play out.
Speaker Change: Some of them were venture capital type investors, who had a very short term timeframe and wanted to see if monetization would happen quickly. Unfortunately, the market hasn't really developed as quickly as we'd hope we have had some success with.
Speaker Change: Ultra high net worth families and that's really where we think the future lies in terms of caret and building a book of investors that can really show the value of that asset.
Speaker Change: We gave them a redemption option.
Speaker Change: After two years, they did decide to use it.
Speaker Change: So that first round was going to be mostly redeemed and we just decided it was.
Speaker Change: Probably we gotten all of the benefit from that.
Speaker Change: That round, we should just cleaned it up entirely and not have a couple of dribs and drabs still out there. So we've redeemed that that rounds. So you can stop thinking about it but the redemption price was the original purchase price.
Speaker Change: Any distributions and we had a caret event in the interim so they've got the original purchase price minus the distributions or they'd already received.
Speaker Change: That's helpful.
Speaker Change: I'll get your capital plan.
Speaker Change: One nine times leverage I think youre approaching two times.
Speaker Change: Would you guys consider Andy.
Speaker Change: Ground lease sales as a means to read some liquidity.
Speaker Change: Yeah look I think the.
Speaker Change: Strength of the balance sheet and the JV partner has given us a little bit of flexibility here to look at some alternatives Ah sales don't take place quickly. So it's not something you turn on and off but we certainly think there is some small portion of the portfolio that you know, maybe we can redeploy into higher rates.
Speaker Change: So we'll look at a couple of those alternatives I don't think that's the long term capital solution, but youre right, we could squeeze some money out and extend the runway here.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is coming from Rich Anderson with Wedbush Your line is life.
Richard Charles Anderson: Just a follow up on the caret Jay.
Richard Charles Anderson: To what degree does the redemption sort of.
Richard Charles Anderson: Sort of impact your future efforts around selling caret securitizing caret or whatever is there no change or you know would you would you say you look at the rationale behind the you know the redemption.
Richard Charles Anderson: It makes maybe for more difficult sell going forward I'm, just curious where your mind is now at the carrier with with this event happening.
Speaker Change: Yeah, Hey, rich.
Speaker Change: I will tell you the biggest driver of carriers at this point is getting the deal flow back turned on.
Speaker Change: Lots of lots of.
Speaker Change: Questions around that that seems to be the major driver.
Speaker Change: The first round I think everybody understood you know it was a it was a first step towards a much bigger game we.
Speaker Change: We do think after two years, we really have identified this ultra high net worth family network as the perfect Investor So I don't think anybody.
Speaker Change: It was too worried about a couple venture capital firms that have different time frames.
Speaker Change: I would say again the number one variable that I looked through and I think as is really the key to monetize and caret is getting the growth rate turned back on.
Speaker Change: Yep, Okay, and then in terms of the growth rate.
Speaker Change: I know you know your it slowed down quite a bit but.
Speaker Change: Is there a perhaps a larger element or a changing element of of the types of deals whether it's originations for some type of transaction that happens, but are you seeing more in the way of a pre existing.
Speaker Change: Ground leases that are becoming available that you might consider as part of a bigger part of the overall.
Speaker Change: You know pipeline going forward or has that not changed sort of the makeup of the pipeline.
Speaker Change: Hey, guys. This is Tim.
Timothy Doherty: The makeup of the pipeline stayed relatively the same I mean, you're sort of focused on multifamily and <unk>.
Speaker Change: Terms of existing ground leases with over our history, we bought a number of them. They don't come to the market very often it's pretty steady market and that remains the case.
Speaker Change: So where we see those opportunities and are the right person.
Speaker Change: And those but the bulk of the pipeline as new originations.
Speaker Change: Thanks for that.
Speaker Change: Thank you.
Speaker Change: Our next question is coming from Kenneth Lee with RBC. Your line is nice.
Kenneth S. Lee: Hey, good morning, Thanks for taking my question in regards to.
Kenneth S. Lee: Your confidence in closing some of those or majority of the eight L. O wise in the second quarter. Just wondering if you could just further flushed that out you know what factors are driving this confidence for closing these deals. Thanks.
Speaker Change: Yes.
Speaker Change: Those are all moving towards closing.
Speaker Change: Confidence is.
Speaker Change: The last couple of weeks these deals have have have.
Speaker Change: We have continued to move forward, which were the rate rise was comfortable piece of it.
Speaker Change: However, look they're not closed yet so there's no guarantees, but we're pretty confident where they've said in the process of closing that.
Speaker Change: Is that the vast majority if not all will will get there.
Speaker Change: Got you very helpful and just one follow up in terms of the.
Speaker Change: The economic yields looks at economic yields on the otherwise we're around seven 5% is just sort of like a good range I know that historically, you talked about expecting about a 100 basis points above risk free rates, but just wanted to get your sense of how economic yields are shaping up for for some of the newer originations. Thanks.
Speaker Change: Obviously this is a new territory or these are the highest yields we've been able to generate so customers are adapting to a marketplace that continues to shift.
Speaker Change: We've.
Speaker Change: Seen cap rates back up.
Speaker Change: That's starting to make deals.
Speaker Change: Possible, but as Tim said, it's it's still a little bit touch and go when rates get this high you lose you lose a number of customers who.
Speaker Change: I think we'll come back to the trough when when there is an opportunity to.
Speaker Change: Lock in rates, a little bit lower than this.
Speaker Change: We think seven and a half is great, but honestly as long as we're meeting our benchmark a little bit lower rates would be better.
Speaker Change: Got you very helpful. There. Thanks again.
Speaker Change: Thank you. Our next question is coming from Hirsch and money with Green Street. Your line is live.
Hirsch: Thank you.
Hirsch: Going back to the cabinet redemption.
Hirsch: What was the conversation or a Bachelor of gumption, but with the outside investors.
Hirsch: What they're saying that Duke valuation of gathered today was well below the $1 75 billion.
Hirsch: That would be paid for.
Hirsch: Hours ago or was it most near liquidity each.
Hirsch: Because <unk> was not listed on the public market.
Hirsch: They just needed some liquidity and any sense at all on that conversation would be up.
Speaker Change: Yeah, I I don't want to speak for them, but there was no conversation with the V. CS around value it was entirely our.
Speaker Change: Liquidity and what are the prospects in the near term of our monetization and we were you know we were candid with them until that growth rate kicks up well that was not something near term that they should expect them.
Speaker Change: Yes.
Speaker Change: I don't think we're disappointed we understood that the trade they were making I think with our high net worth families. It was a different conversation is much more focused on future rounds, and what what kind of scale, we will shoot for them. So thats a better conversation thats the right conversation.
Speaker Change: And that one I am sure there will be a valuation component too as we think about future investors.
Speaker Change: But with the V C.
Speaker Change: Entirely about.
Speaker Change: We jumped in here, we thought there was a chance this wood.
Speaker Change: Be recognized very quickly and you guys be able to monetize that you've done a good job but.
Speaker Change: If theres no near term prospect.
Speaker Change: Yeah.
Speaker Change: This isn't exactly what we do for a living.
Speaker Change: Okay I'll leave it there thank.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is coming from Stephen laws with Raymond James Your line is life.
Stephen Albert Laws: Hi, good morning.
Stephen Albert Laws: J a lot covered on the pipeline, but one follow up.
Stephen Albert Laws: How quickly can it if rates were to go back to four and a quarter of 4% does it take six weeks to ramp because it takes six months how quickly would you expect borrowers to step out and take advantage of that and how quickly can you guys move to ramp that up.
Speaker Change: Let me ticket the Tim I mean.
Timothy Doherty: It can move quickly whether the deals can close quickly is a different question, but in terms of interest levels to them. You saw you saw some elasticity last time rates, though right I think let me see it with the Jay mentioned earlier with the rate drop at the end of last year.
Timothy Doherty: Relative I guess short term stability and visibility.
Timothy Doherty: Was there you saw a big ramp up in <unk> and the deal flow of the entire market regulators about the macro market not just us.
Timothy Doherty: And I think Thats a good starting point for the length of time. Some of these take because it took time for those to get to market to start bringing up the cap stacks together. So typical real estate youre seeing deals that are short term two months to get from start to finish and normal way three to four months. So once the market shifts and people.
Timothy Doherty: See that and get that confidence of the visibility and stability.
Timothy Doherty: That's usually about the timeframe, you'll see that's why you see that fluctuation quarter to quarter when normal market right. It takes time to ramp up our pipes.
Timothy Doherty: Pipeline for the entire market not just capital providers such as ourselves.
Timothy Doherty: Great.
Speaker Change: As a follow up on which to the UCA.
Speaker Change: I think the marks on office assets makes sense and given annual appraisals I guess, it's been coming for a few quarters should be expected.
Speaker Change: Can you talk about the tail. There is if you look at you know the.
Speaker Change: The worst office, where are those attached and kind of what's the cushion there.
Speaker Change: When you look at your most risky situations office and then the.
Speaker Change: Other property types the.
Speaker Change: The Ltvs really haven't changed materially so those valuations held in or when we have a marked out in those valuations as we roll forward. It does seem like values across all property types or are down and I'm, just curious kind of how those other property types of have held out.
Speaker Change: Yeah.
Speaker Change: Yeah, just generically I would say the cap rate assumptions.
Speaker Change: CBRE uses have definitely gone up so that that will impact all asset classes.
Speaker Change: But we've seen rent growth in some of the certainly multifamily offset that to a great degree. So thats the dynamic sort of in the multifamily spaces, how fast rents are moving versus how fast cap rates are adjusting upwards.
Speaker Change: You know office is different it's tougher in terms of there is excess supply and a lot of market. So.
Speaker Change: I do think the LTV is going up faster is reflective of higher rates and tougher fundamentals youre not seeing the.
Speaker Change: The same dynamics, we're seeing in multifamily.
Speaker Change: I think Brett you said, 80% of our office.
Speaker Change: Office book has now gone through a CBRE a reappraisal in the last two quarters. So we'll.
Speaker Change: We'll see where the last 20% of that comes out.
Speaker Change: And this is a this is a market that's going to have to adjust and adapt.
Speaker Change: Certainly here to lower rates would be helpful.
Speaker Change: Probably provide some some confidence that today, we're not seeing.
Speaker Change: Great I appreciate the comments this morning.
Speaker Change: Thank you. Our next question is coming from Kelly <unk> with Morgan Stanley. Your line is live.
Kelly: Alright. Thank you for the question just a quick one back on caret is there a threshold that you feel like you need to cross before the focus kind of goes back to Karen maybe it's stringing together a couple of a series of positive quarters in the origination front or something thank you.
Kelly: Yeah, I think that that is probably the biggest variable right now is when does growth kick back in.
Kelly: And I think that's a function of external growth in terms of new deals and also just stability in the existing book UCA.
Speaker Change: So a couple of quarters would do it.
Speaker Change: But this is a this is a long term.
Speaker Change: Investment.
Speaker Change: People are trying to center on a growth rate.
Speaker Change: We're still relatively new as a company.
Speaker Change: So.
Speaker Change: Putting a couple new strong quarters on the board.
Speaker Change: <unk> is really what people are waiting for it to be honest.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is coming from Matthew Howlett with B Riley Your line is live.
Matthew Philip Howlett: Oh, Hey, good morning, Thanks for taking my question so what's the update on <unk>.
Matthew Philip Howlett: On Fitch in their review I know that.
Matthew Philip Howlett: They reaffirmed the a few months ago, and then just remind me again, what the state with the interest cost savings could be if you had the dual <unk> similarly minus.
Brett: Hey, Matt it's Brett.
Brett: So when we think about our conversations that we've had with fish over the last couple of years I think what we've outlined for them is that the credit looks materially different than longer frustrated obviously the asset base today versus early 2021 has doubled revenues and net income have doubled.
Brett: Unencumbered asset base has grown fivefold over $4 billion of unencumbered assets I think the big piece of the puzzle was a year ago, when we closed the internalization.
Matthew Philip Howlett: Yep changed a lot of the governance aspects that they evaluate aerostar.
Matthew Philip Howlett: I think from a liquidity perspective, our revolvers now yes three.
Matthew Philip Howlett: Three and a half times the size of what it was three years ago.
Matthew Philip Howlett: We've been able to prove out in public and private.
Matthew Philip Howlett: Capital raising in the debt markets. We've played across the curve I think we've gotten our cost structure in line I think we've prudently hedged.
Matthew Philip Howlett: You take the combination of all of that and it feels like we're a different credit today than we were a few years ago.
Matthew Philip Howlett: I think when we.
Matthew Philip Howlett: Ask what is it that we need to do to get there.
Matthew Philip Howlett: A lot of it is continue to do what Youre doing we obviously are a newer company in the <unk> space building that track record in building that operating history is important.
Matthew Philip Howlett: So they want to continue to see us do that so we're having constructive conversations with them and we're going to continue to push there I think from an interest cost savings perspective.
Matthew Philip Howlett: We obviously have seen some of the flow through from the Moody's upgrade in the fourth quarter.
Matthew Philip Howlett: Even today when you look at the bonds that we just issued back in February they're trading 15 to 20 basis points tighter on a spread basis that we've seen.
Matthew Philip Howlett: Some of the flow through there.
Matthew Philip Howlett: But I would expect to see you know another 20 plus basis points of incremental savings.
Matthew Philip Howlett: If we get that second a rating I know it'll be certainly helpful to both the public and private side and that remains our objective and we're going to continue to do what we can to control.
Matthew Philip Howlett: That aspect for us.
Matthew Philip Howlett: Well that could be say 20 or 30 basis points.
Matthew Philip Howlett: That could be significant for new 30 year unsecured debt.
Matthew Philip Howlett: Absolutely yeah.
Matthew Philip Howlett: Tim and Jay have spoken about on the origination side I think the the pass through to our customers and being able to provide the best cost of capital for them to be able to get deals over the hump now we want to make you know the appropriate margins for this business I think a lot of the hedging that we've done we will start to flow through as we.
Matthew Philip Howlett: Procure long term debt and pay down our revolver borrowings, but we're sitting here today.
Matthew Philip Howlett: And you know we have ample liquidity, we're hedged and at the end of the day, we want to make sure all the good work that we've been able to exhibit over the last few years to the agencies and creditors and that flows through to what you know what we feel is today, great relative value for investors, but we're going to continue to look to tighten that.
Matthew Philip Howlett: GAAP versus other investment grade names.
Speaker Change: Great and then maybe one bigger bigger picture question for you Jay when you get to a normalized market lets just look out a year or two do you still feel it.
Matthew Philip Howlett: Alien billion, and a half and annual originations and when I run my model should I still run at XD.
Matthew Philip Howlett: 60% debt, 40% equity and I guess the question is over time, given just the low risk. That's in these grandly come just can you take leverage up it just seems like over time when I run my.
Matthew Philip Howlett: Leverage over time will go up just given.
Matthew Philip Howlett: The risks and our risk adjusted returns here on that asset.
Speaker Change: Yeah, we certainly built the business to do a $1 billion plus a year, we think the market size of the opportunity.
Speaker Change: Makes that very very doable in a normalized market. So I think that.
Matthew Philip Howlett: That number feels right to us we're just not seeing that right now and that's a function of.
Matthew Philip Howlett: I think the volatility and uncertainty in the market and just the nominal rates relative to cap rates isn't lining up great a lot of areas.
Matthew Philip Howlett:
Matthew Philip Howlett: Yeah.
Matthew Philip Howlett: I don't think we've.
Matthew Philip Howlett: <unk>, our mind right now in terms of where we think the right leverage levels are but this business was meant to scale to a much larger number and I think that's really our goal.
Speaker Change: Yeah, we're not we're not.
Speaker Change:
Speaker Change: Anywhere close to what I think the true size and scale of this business should be and that's the time, we could certainly try to.
Speaker Change: Refine our thinking on leverage but right now we're just trying to get the scale that is that has always been our goal.
Speaker Change: <unk>.
Speaker Change: They know the markets are going up markets are growing down the stresses here there stresses there.
Speaker Change: But our goal has to be to get to scale, because I think youre going to see some of the dynamics on care at some of the dynamics in terms of.
Speaker Change: Our overhead as a percentage of assets and as a percentage of revenue will all start to fall down into our long term goals.
Speaker Change: And we're just not there yet so.
Speaker Change: Before we do something on the scale.
Speaker Change: Right side of the balance sheet in terms of changing mix I think I think we need to get a little bit bigger and a little bit.
Speaker Change: Or to our goals and then we can re look at that.
Speaker Change: Great. Thanks, Jay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Thank you Mr. Hoffman, we have no further questions.
Speaker Change: Great. Thank you if you should have any additional questions on today's release, please feel free to reach out to me directly.
Speaker Change: Operator would you mind, giving the conference call replay instructions once again.
Speaker Change: <unk> there will be a replay of this conference beginning at two P M Eastern time today.
Speaker Change: The dial in for the replay is 870 74814010 with.
Speaker Change: With the confirmation code of 504 75.
Speaker Change: This does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.